Stocks continue their march to new record highs. For the week, the Dow rose 1.0%, the S&P gained 1.4%, and the Nasdaq was higher by 1.3%. Gold saw its best day in nine months on Thursday and best week in four months for a 3.3% gain. Oil surprisingly saw little change on the week, rising just 0.3% to $107 per barrel. The international Brent oil saw more of the action, rising to nine-month highs of $114.68 per barrel.
Source: Yahoo Finance
Stocks continued their slow and steady rise despite the lingering geopolitical events. The situation unfolding in Iraq had little impact on the market this week, despite conditions on the ground deteriorating. Oil production and exports have been relatively unaffected, though, which is obviously reassuring to the markets. That doesn’t mean all is well, but was enough to help the markets this week.
News from the Fed this week was the only item that had much impact on the markets.
Early in the week and before the Fed meeting, the CPI inflation report showed prices rising the most in a year last month, keeping the inflation level above 2%. Worth noting, they break the inflation number out into segments and the one for meat, poultry, fish, and eggs hit its most expensive level in history. The inflation story is significant.
This inflation report was important because a 2% increase is the level targeted by the Fed. It means we have met the Fed’s target, which lead many investors to believe the Fed would pull back further from their stimulus policies.
With that new inflation information, investors were anxious to see if the Fed would make any changes in their policy meeting this week. It turned out they told us little we didn’t expect. They would continue to pull back on their bond buying, where they created money out of thin air to buy government and mortgage bonds. They would also keep interest rates low for a considerable time.
The Fed did lower its expectation for economic growth this year, but oddly at the same time took an upbeat stance on the economy. It’s worth noting they have never been correct on their economic projections, where the economy has always performed below their expectations.
What really moved markets, though, was when asked if the higher inflation would impact their policies. Fed chief Janet Yellen dismissed the higher prices as noise and confirmed their commitment to keeping interest rates low for a long time. Stocks jumped on the news as investors see the Fed continuing to provide a backdrop for stocks to go higher.
This dismissal of higher inflation is worrisome to us, especially by calling it noise. It’s not noise to the people paying the highest prices ever at the grocery store, which means less spending elsewhere and slower economic growth.
It also dismisses another of their goals. Several months ago we surpassed the Fed’s other target of 6.5% unemployment (we currently stand at 6.3%). The achievement was ignored and then removed as a goal. This shows their stated objectives are meaningless, for what is the purpose of setting a target if it will not be adhered to?
As for other economic info this week, the data came in on the positive side. Economic activity in the northeast showed improvement while industrial production also ticked higher.
Next Week
While troubles in Iraq and Ukraine are likely to continue next week, it will probably have little impact on our markets again like it did this week. There will be a few economic reports worth watching, including a revision to first quarter GDP, info on manufacturing, housing, durable goods, and personal income and spending. None are likely to have a significant impact on the market, so it may again be a fairly quiet week.
Investment Strategy
Again, no change here. Investors see no reason to worry with the Fed showing its commitment to higher markets. The VIX index, or fear gauge, now stands at seven year lows, so everyone is on board. When everyone believes the market will do one thing, it tends to do the opposite, so that is reason for caution.
Stocks are on the expensive side, so we aren’t doing any buying of the broader index at this point. We aren’t selling now either, though. For new money, we’d prefer to find undervalued individual names instead of the broader market indexes. A look at a company’s fundamentals tells us if it’s a good one to buy, while technical analysis (the charts) will tell us if it is a good time to buy.
The bond market remains volatile. Prices remain stuck in a range, showing no real indication of moving higher or lower. We take a longer view with this sector and there are worries that with prices so high, they are likely to fall in the future. A bet on this scenario (a short position, which bets that prices will fall and yields rise) acts as a good hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
TIPs have done well on the recent higher inflation data. We think they remain an important hedge against future inflation. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another hedge for the portfolio, showing a nice gain this week. However, it has been around this level for many months now, doing very little.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
News from the Fed this week was the only item that had much impact on the markets.
Early in the week and before the Fed meeting, the CPI inflation report showed prices rising the most in a year last month, keeping the inflation level above 2%. Worth noting, they break the inflation number out into segments and the one for meat, poultry, fish, and eggs hit its most expensive level in history. The inflation story is significant.
This inflation report was important because a 2% increase is the level targeted by the Fed. It means we have met the Fed’s target, which lead many investors to believe the Fed would pull back further from their stimulus policies.
With that new inflation information, investors were anxious to see if the Fed would make any changes in their policy meeting this week. It turned out they told us little we didn’t expect. They would continue to pull back on their bond buying, where they created money out of thin air to buy government and mortgage bonds. They would also keep interest rates low for a considerable time.
The Fed did lower its expectation for economic growth this year, but oddly at the same time took an upbeat stance on the economy. It’s worth noting they have never been correct on their economic projections, where the economy has always performed below their expectations.
What really moved markets, though, was when asked if the higher inflation would impact their policies. Fed chief Janet Yellen dismissed the higher prices as noise and confirmed their commitment to keeping interest rates low for a long time. Stocks jumped on the news as investors see the Fed continuing to provide a backdrop for stocks to go higher.
This dismissal of higher inflation is worrisome to us, especially by calling it noise. It’s not noise to the people paying the highest prices ever at the grocery store, which means less spending elsewhere and slower economic growth.
It also dismisses another of their goals. Several months ago we surpassed the Fed’s other target of 6.5% unemployment (we currently stand at 6.3%). The achievement was ignored and then removed as a goal. This shows their stated objectives are meaningless, for what is the purpose of setting a target if it will not be adhered to?
As for other economic info this week, the data came in on the positive side. Economic activity in the northeast showed improvement while industrial production also ticked higher.
Next Week
While troubles in Iraq and Ukraine are likely to continue next week, it will probably have little impact on our markets again like it did this week. There will be a few economic reports worth watching, including a revision to first quarter GDP, info on manufacturing, housing, durable goods, and personal income and spending. None are likely to have a significant impact on the market, so it may again be a fairly quiet week.
Investment Strategy
Again, no change here. Investors see no reason to worry with the Fed showing its commitment to higher markets. The VIX index, or fear gauge, now stands at seven year lows, so everyone is on board. When everyone believes the market will do one thing, it tends to do the opposite, so that is reason for caution.
Stocks are on the expensive side, so we aren’t doing any buying of the broader index at this point. We aren’t selling now either, though. For new money, we’d prefer to find undervalued individual names instead of the broader market indexes. A look at a company’s fundamentals tells us if it’s a good one to buy, while technical analysis (the charts) will tell us if it is a good time to buy.
The bond market remains volatile. Prices remain stuck in a range, showing no real indication of moving higher or lower. We take a longer view with this sector and there are worries that with prices so high, they are likely to fall in the future. A bet on this scenario (a short position, which bets that prices will fall and yields rise) acts as a good hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
TIPs have done well on the recent higher inflation data. We think they remain an important hedge against future inflation. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another hedge for the portfolio, showing a nice gain this week. However, it has been around this level for many months now, doing very little.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
